I'm shorting Krispy Kreme today

[KaneKungFu123]

Do they have to report when they sell? otherwise, suppose they have aa 4% holding from whenever. They buy another 2%, this creates good news, then they sell for a profit?

[KaneKungFu123]

Why would anyone takeover KKD at this price? It is obvious that they are failing and heading towards bankruptcy. Why not just wait, then take themover at .5/share?

[Sniper]

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Why would anyone takeover KKD at this price? It is obvious that they are failing and heading towards bankruptcy. Why not just wait, then take themover at .5/share?

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Because they don't believe Cat is correct is in his analysis... they believe that the steps being taken to save the company will work... and of course, because they like donuts! [img]/images/graemlins/wink.gif[/img]

Also, a 5%+ stake is not a takeover.

[DesertCat]

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Why would anyone takeover KKD at this price? It is obvious that they are failing and heading towards bankruptcy. Why not just wait, then take themover at .5/share?

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Well, the Kuwaitis might want some leverage to help them get franchise rights. Others might look back at a company that "made" almost $1 per share in 2004, and think with a turnaround, todays price is cheap. It's certainly possible they'll get back to that level. If Brewster can figure out a profitable franchising model, i.e. roll out popular coffee drinks, the sky is the limit. If KKD just matched the profitability of Duncan Donuts, it could make over $1 per share even with the large decline in revenues.

I think they haven't figured out the right store model yet, and don't have enough capital to redo the (way too large) stores once they do figure it out. So far the market seems to think they have enough time and capital and that Brewster is the right guy. That's okay, as a value investor I am used to disagreeing with the market consensus. We'll see if I can be proven right before all my options expire.

[Sniper]

Cat whats the odds that the Kuwaities are backing up their equity investment with debt financing as well?

[DesertCat]

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Cat whats the odds that the Kuwaities are backing up their equity investment with debt financing as well?

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Well, I'm betting there is almost no chance and I don't think I'm deluding myself. I say this because the current financing is secured by all of KKD's assets, so the only additional debt would have to be totally unsecured. And they don't have audited financials for the last five years or so. I just can't see any new debt, or even stock sales, without audited financials and maybe resolution of the shareholder/franchisee suits. Even a buyout of existing debt-holders would be tough without financials.

Something like a large prepayment to purchase franchise rights for the middle east would make much more sense. They help KKD through a liquidity crunch, and get an asset in return for their investment. That's something that would scare me, for sure.

[Jim T]

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One last post. Reviewing the bankruptcy filings of Freedom Rings, their Philadelphia based regional franchisee, was pretty interesting. Specifically I read their operating report for December. Average sale per store was less than $30k per week. In total, their numbers were like this (for 5.5 stores),

Gross Sales $605k
Net Sales $400k (i.e. after ingredient cost)
Labor -166k (even running very few shifts)
Transport costs -$167k (drivers, gas, etc)
Back Office -$59k
Other Ops Costs -$72k
Royalties -$33k

Net cash flow -$91k

And this is without paying their rent or truck lease costs (since they were in bankruptcy)!



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Are you sure you're reading that correctly? I simply can't imagine how they managed to spend more in "transportation" than they did for labor costs - and almost as much for their ingredients! And this is without paying for 'truck lease costs' besides????

That simply cannot be correct. Either you mis-read something, they had a typo of some sort, or they were putting a lot of other things into "transportation" that don't belong there.

[Jim T]

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Transport costs, which is maintenance and gas, was $1k per week per store. My guess was that truck leases were 3x that, or $3k per store/week. I used $2 per SF per month for an average 4000 SF store, which works out to $2k per store/week. Lastly, I assumed store labor costs doubled when sales doubled.

I was probably way too aggressive on truck costs. I might be aggressive on how much the store labor costs increased to double sales, but note I didn't increase transporation labor and other costs at all to transport twice as much product, so that's probably a wash. Lowering truck lease to equal maintaince/gas charges lowers our break-even to around $50k per store/week. Note that the average KKD store is well below $50k per week now.

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$2 per square foot per month sounds way too high. I'm about to sign a lease for 2000 sq ft in a very good retail location (though admittedly it is in Greenville SC) for about half that.

Also, are KK locations really that big on average? I saw one in Florida that was about 4000 sq. ft, but the one I'm most familiar with (also in Florida) was maybe half that.

[DesertCat]

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Are you sure you're reading that correctly? I simply can't imagine how they managed to spend more in "transportation" than they did for labor costs - and almost as much for their ingredients! And this is without paying for 'truck lease costs' besides????

That simply cannot be correct. Either you mis-read something, they had a typo of some sort, or they were putting a lot of other things into "transportation" that don't belong there.

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Actually, I it looks like that line did include lease costs. The detailed December P&L statement says

Delivery wages $85,305
Fuel $23,830
Insurance $10,124
Vehicle Lease $34,399
Repairs/Maint. $4,884

This is still a litte short ($10k?), not sure what else they lumped in, could be part of supervisory wages or vacation wages.

[DesertCat]

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$2 per square foot per month sounds way too high. I'm about to sign a lease for 2000 sq ft in a very good retail location (though admittedly it is in Greenville SC) for about half that.

Also, are KK locations really that big on average? I saw one in Florida that was about 4000 sq. ft, but the one I'm most familiar with (also in Florida) was maybe half that.

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Digging through the detail P&L again, I noticed they actually had a line for rent, $41,406. I was wrong that truck leases and rent weren't counted, but even so they still were showing heavy negative cash flow.

I don't know how big the 5.5 stores were (or if they owned some), but assuming 4k SF, that works out to 22k SF, or $2 per square foot. If the stores were smaller, the rent per SF is even higher.

How old was that store in FL? Former CEO Livengood made franchisees develop huge "factory stores", i.e. "donut theatres" where the family could watch donuts being made. They required 4,000 SF. I wouldn't be surprised if original KKD stores were smaller. Also as part of the turnaround effort, KKD is trying concepts called "satellite" stores that are much smaller and only have re-heating equipment. So far, some of these are just reconfigured factory stores of the same size, but it would be interesting if you saw a real live new small satellite concept in action.